What Is Self-Employment Tax?
Self-employment (SE) tax is social security and Medicare taxes collected primarily from individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Payments of SE tax contribute to the taxpayer's coverage under the social security system. Social security coverage provides taxpayers with retirement, disability, survivor, and hospital insurance (Medicare) benefits.
A recent tax law change provides for a temporary decrease in the employee's share of payroll tax. Social security will be withheld from an employee's wages at the rate of 4.2%(down from 6.2%), up to the social security wage limit of $106,800. There is no change to Medicare withholding. The same reduction applies to net earnings from self-employment—the temporary rate will be 10.4% (down from 12.4%), up to the social security wage limit of $106,800. As a result of this change, the overall self-employment tax is reduced from 15.3% to 13.3%. See Schedule SE Instructions for more information.
SE tax must be paid if either of these apply: